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Prior TaxPrior tax 5. Prior tax Recordkeeping Table of Contents How To Prove ExpensesWhat Are Adequate Records? What If I Have Incomplete Records? Separating and Combining Expenses How Long To Keep Records and Receipts Examples of Records If you deduct travel, entertainment, gift, or transportation expenses, you must be able to prove (substantiate) certain elements of expense. Prior tax This chapter discusses the records you need to keep to prove these expenses. Prior tax If you keep timely and accurate records, you will have support to show the IRS if your tax return is ever examined. Prior tax You will also have proof of expenses that your employer may require if you are reimbursed under an accountable plan. Prior tax These plans are discussed in chapter 6 under Reimbursements . Prior tax How To Prove Expenses Table 5-1 is a summary of records you need to prove each expense discussed in this publication. Prior tax You must be able to prove the elements listed across the top portion of the chart. Prior tax You prove them by having the information and receipts (where needed) for the expenses listed in the first column. Prior tax You cannot deduct amounts that you approximate or estimate. Prior tax You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. Prior tax You must generally prepare a written record for it to be considered adequate. Prior tax This is because written evidence is more reliable than oral evidence alone. Prior tax However, if you prepare a record on a computer, it is considered an adequate record. Prior tax What Are Adequate Records? You should keep the proof you need in an account book, diary, log, statement of expense, trip sheets, or similar record. Prior tax You should also keep documentary evidence that, together with your record, will support each element of an expense. Prior tax Documentary evidence. Prior tax You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. Prior tax Exception. Prior tax Documentary evidence is not needed if any of the following conditions apply. Prior tax You have meals or lodging expenses while traveling away from home for which you account to your employer under an accountable plan, and you use a per diem allowance method that includes meals and/or lodging. Prior tax ( Accountable plans and per diem allowances are discussed in chapter 6. Prior tax ) Your expense, other than lodging, is less than $75. Prior tax You have a transportation expense for which a receipt is not readily available. Prior tax Adequate evidence. Prior tax Documentary evidence ordinarily will be considered adequate if it shows the amount, date, place, and essential character of the expense. Prior tax For example, a hotel receipt is enough to support expenses for business travel if it has all of the following information. Prior tax The name and location of the hotel. Prior tax The dates you stayed there. Prior tax Separate amounts for charges such as lodging, meals, and telephone calls. Prior tax A restaurant receipt is enough to prove an expense for a business meal if it has all of the following information. Prior tax The name and location of the restaurant. Prior tax The number of people served. Prior tax The date and amount of the expense. Prior tax If a charge is made for items other than food and beverages, the receipt must show that this is the case. Prior tax Canceled check. Prior tax A canceled check, together with a bill from the payee, ordinarily establishes the cost. Prior tax However, a canceled check by itself does not prove a business expense without other evidence to show that it was for a business purpose. Prior tax Duplicate information. Prior tax You do not have to record information in your account book or other record that duplicates information shown on a receipt as long as your records and receipts complement each other in an orderly manner. Prior tax You do not have to record amounts your employer pays directly for any ticket or other travel item. Prior tax However, if you charge these items to your employer, through a credit card or otherwise, you must keep a record of the amounts you spend. Prior tax Timely-kept records. Prior tax You should record the elements of an expense or of a business use at or near the time of the expense or use and support it with sufficient documentary evidence. Prior tax A timely-kept record has more value than a statement prepared later when generally there is a lack of accurate recall. Prior tax You do not need to write down the elements of every expense on the day of the expense. Prior tax If you maintain a log on a weekly basis that accounts for use during the week, the log is considered a timely-kept record. Prior tax If you give your employer, client, or customer an expense account statement, it can also be considered a timely-kept record. Prior tax This is true if you copy it from your account book, diary, log, statement of expense, trip sheets, or similar record. Prior tax Proving business purpose. Prior tax You must generally provide a written statement of the business purpose of an expense. Prior tax However, the degree of proof varies according to the circumstances in each case. Prior tax If the business purpose of an expense is clear from the surrounding circumstances, then you do not need to give a written explanation. Prior tax Example. Prior tax If you are a sales representative who calls on customers on an established sales route, you do not have to give a written explanation of the business purpose for traveling that route. Prior tax You can satisfy the requirements by recording the length of the delivery route once, the date of each trip at or near the time of the trips, and the total miles you drove the car during the tax year. Prior tax You could also establish the date of each trip with a receipt, record of delivery, or other documentary evidence. Prior tax Confidential information. Prior tax You do not need to put confidential information relating to an element of a deductible expense (such as the place, business purpose, or business relationship) in your account book, diary, or other record. Prior tax However, you do have to record the information elsewhere at or near the time of the expense and have it available to fully prove that element of the expense. Prior tax What If I Have Incomplete Records? If you do not have complete records to prove an element of an expense, then you must prove the element with: Your own written or oral statement containing specific information about the element, and Other supporting evidence that is sufficient to establish the element. Prior tax If the element is the description of a gift, or the cost, time, place, or date of an expense, the supporting evidence must be either direct evidence or documentary evidence. Prior tax Direct evidence can be written statements or the oral testimony of your guests or other witnesses setting forth detailed information about the element. Prior tax Documentary evidence can be receipts, paid bills, or similar evidence. Prior tax If the element is either the business relationship of your guests or the business purpose of the amount spent, the supporting evidence can be circumstantial rather than direct. Prior tax For example, the nature of your work, such as making deliveries, provides circumstantial evidence of the use of your car for business purposes. Prior tax Invoices of deliveries establish when you used the car for business. Prior tax Table 5-1. Prior tax How To Prove Certain Business Expenses IF you have expenses for . Prior tax . Prior tax THEN you must keep records that show details of the following elements . Prior tax . Prior tax . Prior tax Amount Time Place or Description Business Purpose Business Relationship Travel Cost of each separate expense for travel, lodging, and meals. Prior tax Incidental expenses may be totaled in reasonable categories such as taxis, fees and tips, etc. Prior tax Dates you left and returned for each trip and number of days spent on business. Prior tax Destination or area of your travel (name of city, town, or other designation). Prior tax Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. Prior tax Relationship: N/A Entertainment Cost of each separate expense. Prior tax Incidental expenses such as taxis, telephones, etc. Prior tax , may be totaled on a daily basis. Prior tax Date of entertainment. Prior tax (Also see Business Purpose. Prior tax ) Name and address or location of place of entertainment. Prior tax Type of entertainment if not otherwise apparent. Prior tax (Also see Business Purpose. Prior tax ) Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. Prior tax For entertainment, the nature of the business discussion or activity. Prior tax If the entertainment was directly before or after a business discussion: the date, place, nature, and duration of the business discussion, and the identities of the persons who took part in both the business discussion and the entertainment activity. Prior tax Relationship: Occupations or other information (such as names, titles, or other designations) about the recipients that shows their business relationship to you. Prior tax For entertainment, you must also prove that you or your employee was present if the entertainment was a business meal. Prior tax Gifts Cost of the gift. Prior tax Date of the gift. Prior tax Description of the gift. Prior tax Transportation Cost of each separate expense. Prior tax For car expenses, the cost of the car and any improvements, the date you started using it for business, the mileage for each business use, and the total miles for the year. Prior tax Date of the expense. Prior tax For car expenses, the date of the use of the car. Prior tax Your business destination. Prior tax Purpose: Business purpose for the expense. Prior tax Relationship: N/A Sampling. Prior tax You can keep an adequate record for parts of a tax year and use that record to prove the amount of business or investment use for the entire year. Prior tax You must demonstrate by other evidence that the periods for which an adequate record is kept are representative of the use throughout the tax year. Prior tax Example. Prior tax You use your car to visit the offices of clients, meet with suppliers and other subcontractors, and pick up and deliver items to clients. Prior tax There is no other business use of the car, but you and your family use the car for personal purposes. Prior tax You keep adequate records during the first week of each month that show that 75% of the use of the car is for business. Prior tax Invoices and bills show that your business use continues at the same rate during the later weeks of each month. Prior tax Your weekly records are representative of the use of the car each month and are sufficient evidence to support the percentage of business use for the year. Prior tax Exceptional circumstances. Prior tax You can satisfy the substantiation requirements with other evidence if, because of the nature of the situation in which an expense is made, you cannot get a receipt. Prior tax This applies if all the following are true. Prior tax You were unable to obtain evidence for an element of the expense or use that completely satisfies the requirements explained earlier under What Are Adequate Records . Prior tax You are unable to obtain evidence for an element that completely satisfies the two rules listed earlier under What If I Have Incomplete Records . Prior tax You have presented other evidence for the element that is the best proof possible under the circumstances. Prior tax Destroyed records. Prior tax If you cannot produce a receipt because of reasons beyond your control, you can prove a deduction by reconstructing your records or expenses. Prior tax Reasons beyond your control include fire, flood, and other casualties. Prior tax Table 5-2. Prior tax Daily Business Mileage and Expense Log Name: Odometer Readings Expenses Date Destination (City, Town, or Area) Business Purpose Start Stop Miles this trip Type (Gas, oil, tolls, etc. Prior tax ) Amount Weekly Total Total Year-to-Date Separating and Combining Expenses This section explains when expenses must be kept separate and when expenses can be combined. Prior tax Separating expenses. Prior tax Each separate payment is generally considered a separate expense. Prior tax For example, if you entertain a customer or client at dinner and then go to the theater, the dinner expense and the cost of the theater tickets are two separate expenses. Prior tax You must record them separately in your records. Prior tax Season or series tickets. Prior tax If you buy season or series tickets for business use, you must treat each ticket in the series as a separate item. Prior tax To determine the cost of individual tickets, divide the total cost (but not more than face value) by the number of games or performances in the series. Prior tax You must keep records to show whether you use each ticket as a gift or entertainment. Prior tax Also, you must be able to prove the cost of nonluxury box seat tickets if you rent a skybox or other private luxury box for more than one event. Prior tax See Entertainment tickets in chapter 2. Prior tax Combining items. Prior tax You can make one daily entry in your record for reasonable categories of expenses. Prior tax Examples are taxi fares, telephone calls, or other incidental travel costs. Prior tax Meals should be in a separate category. Prior tax You can include tips for meal-related services with the costs of the meals. Prior tax Expenses of a similar nature occurring during the course of a single event are considered a single expense. Prior tax For example, if during entertainment at a cocktail lounge, you pay separately for each serving of refreshments, the total expense for the refreshments is treated as a single expense. Prior tax Car expenses. Prior tax You can account for several uses of your car that can be considered part of a single use, such as a round trip or uninterrupted business use, with a single record. Prior tax Minimal personal use, such as a stop for lunch on the way between two business stops, is not an interruption of business use. Prior tax Example. Prior tax You make deliveries at several different locations on a route that begins and ends at your employer's business premises and that includes a stop at the business premises between two deliveries. Prior tax You can account for these using a single record of miles driven. Prior tax Gift expenses. Prior tax You do not always have to record the name of each recipient of a gift. Prior tax A general listing will be enough if it is evident that you are not trying to avoid the $25 annual limit on the amount you can deduct for gifts to any one person. Prior tax For example, if you buy a large number of tickets to local high school basketball games and give one or two tickets to each of many customers, it is usually enough to record a general description of the recipients. Prior tax Allocating total cost. Prior tax If you can prove the total cost of travel or entertainment but you cannot prove how much it cost for each person who participated in the event, you may have to allocate the total cost among you and your guests on a pro rata basis. Prior tax To do so, you must establish the number of persons who participated in the event. Prior tax An allocation would be needed, for example, if you did not have a business relationship with all of your guests. Prior tax See Allocating between business and nonbusiness in chapter 2. Prior tax If your return is examined. Prior tax If your return is examined, you may have to provide additional information to the IRS. Prior tax This information could be needed to clarify or to establish the accuracy or reliability of information contained in your records, statements, testimony, or documentary evidence before a deduction is allowed. Prior tax THIS IS NOT AN OFFICIAL INTERNAL REVENUE FORM Table 5-3. Prior tax Weekly Traveling Expense and Entertainment Record From: To: Name: Expenses Sunday Monday Tuesday Wednesday Thursday Friday Saturday Total 1. Prior tax Travel Expenses: Airlines Excess Baggage Bus – Train Cab and Limousine Tips Porter 2. Prior tax Meals and Lodging: Breakfast Lunch Dinner Hotel and Motel (Detail in Schedule B) 3. Prior tax Entertainment (Detail in Schedule C) 4. Prior tax Other Expenses: Postage Telephone & Telegraph Stationery & Printing Stenographer Sample Room Advertising Assistant(s) Trade Shows 5. Prior tax Car Expenses: (List all car expenses - the division between business and personal expenses may be made at the end of the year. Prior tax ) (Detail mileage in Schedule A. Prior tax ) Gas, oil, lube, wash Repairs, parts Tires, supplies Parking fees, tolls 6. Prior tax Other (Identify) Total Note: Attach receipted bills for (1) ALL lodging and (2) any other expenses of $75. Prior tax 00 or more. Prior tax Schedule A – Car Mileage: End Start Total Business Mileage Schedule B – Lodging Hotel or Motel Name City Schedule C – Entertainment Date Item Place Amount Business Purpose Business Relationship WEEKLY REIMBURSEMENTS: Travel and transportation expenses Other reimbursements TOTAL How Long To Keep Records and Receipts You must keep records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Prior tax Generally, this means you must keep records that support your deduction (or an item of income) for 3 years from the date you file the income tax return on which the deduction is claimed. Prior tax A return filed early is considered filed on the due date. Prior tax For a more complete explanation of how long to keep records, see Publication 583, Starting a Business and Keeping Records. Prior tax You must keep records of the business use of your car for each year of the recovery period. Prior tax See More-than-50%-use test in chapter 4 under Depreciation Deduction. Prior tax Reimbursed for expenses. Prior tax Employees who give their records and documentation to their employers and are reimbursed for their expenses generally do not have to keep copies of this information. Prior tax However, you may have to prove your expenses if any of the following conditions apply. Prior tax You claim deductions for expenses that are more than reimbursements. Prior tax Your expenses are reimbursed under a nonaccountable plan. Prior tax Your employer does not use adequate accounting procedures to verify expense accounts. Prior tax You are related to your employer as defined under Per Diem and Car Allowances , in chapter 6. Prior tax Reimbursements , adequate accounting , and nonaccountable plans are discussed in chapter 6. Prior tax Examples of Records Table 5-2 and Table 5-3 are examples of worksheets which can be used for tracking business expenses. Prior tax Prev Up Next Home More Online Publications
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